How to Invest for Beginners (2022)

All right, here we go! Welcome, guys! In this video, I'm going to be doing a full beginner's guide to investing in the stock market. So buckle up! If you're a beginner, you want to invest but you've never bought a stock before, then this video is definitely going to be for you. We're going to go through the five key steps that you need to follow to get going in the world of investing.

So my name is Brandon; I'll be your captain for this journey. And with that said, let's get rolling!

So quick background: What are shares? What's the stock market? Why are we investing? What are we even doing here? Well, companies like McDonald's or Apple or Tesla, they divide themselves up into millions or billions of little tiny equal pieces, and they are called shares. So owning a share means you own a very small sliver of a company. So you own shares in Apple; you can stand out the front of your nearest Apple store and say, "You know what? I own a piece of that!"

We'll only own a fraction of a gram of paint on the wall, but we will own part of that store. You can think about the pizza: the whole pizza is Apple; then the slices of the pizza are the shares. So the more slices you have, the higher percentage ownership you have of that company.

Then the stock exchanges, like the NASDAQ and the New York Stock Exchange, used to be the physical places that shares were traded. Kind of like if you lived in a village and you wanted to buy some vegetables, you would go to a market. The market is where people would buy and sell goods in the town. So it's the exact same idea with the stock market, except that's the place where shares of publicly traded companies change hands.

Now, as I said, it used to be very analog, very manual. You know, a client calls the broker; he wants to sell some Bank of America shares. The guy starts running around on the floor of the New York Stock Exchange, you know, screaming like a mad fool. Those days are kind of, unfortunately, over because of course these days we just buy and sell stocks through the internet.

The exchanges still exist, but their location is just like in some data center in the middle of nowhere, so it's all rather boring, to be honest. So overall, we're looking to buy some shares; we want to be part owners of a particular business we have in mind, and we're going to buy our shares through an online broker. We'll get to that in a second. But you know, why are we going to all this trouble?

Well, of course, we're doing it to try and make some money because we know that the U.S. market averages about 10% returns every year. You know, the Australian market, where I'm from, is quite similar. So with inflation slowly but surely turning your hundred dollar bills into nothing more than toilet paper, we want to get in on this action and put our savings to use. We want to beat inflation and snowball our wealth.

So let's begin! We have five steps in the process, and it starts with step one: You need to make sure you're in a financial position to be able to invest in the stock market. I'll be very upfront with you guys at the start of the video: The stock market is not a get-rich-quick scheme. All the people that day trade and they tell you they make one percent per day, they are lying. It's just not possible.

Warren Buffett, the world's best investor, only makes twenty percent per year on average. It's because compounding takes quite a while to really ramp up. You can look here: this is five thousand dollars invested per year, compounding at eight percent, and it takes many years for that hockey stick to really get you towards the big bucks.

And because compounding takes a long time to ramp up, you need to be able to sit. You need to be able to let that money just sit in the market for a long time. Okay? You need to ensure the money that you're putting towards investing today won't be needed for at least 10 years. Okay? Can you let that money sit in the market and never touch it?

So obviously, what that means is you know if you have a big credit card debt, you've got to pay that off before you start investing. You know, if you want to buy a house in a year, don't put your house deposit in the stock market. If you're tight on cash and you're hoping the stock market can help you meet your rental payments, just forget it.

If you want to do really well in investing, you need to be able to just let that money sit, uninterrupted. So step one: Make sure you're actually in a position to start investing. Decide what strategy suits you best before you start.

So there are two really solid, proven stock market strategies out there; the rest is pretty much snake oil, unfortunately. There's passive investing through dollar-cost averaging, and then there's Warren Buffett style long-term active investing.

So let's start with passive investing. This is the strategy for people that know the stock market goes up in the long run, but they just want to benefit from that without actually reading annual reports or buying individual stocks.

And this strategy works by what's called a market-tracking ETF. So market-tracking exchange-traded funds are stocks that themselves try to mimic the performance of a stock market index. So explainer time! To keep track of how the market is doing overall, some very smart people decided to group the largest, most influential companies into various indexes.

Yes, I know we should say indices, but for some reason in the stock market, the lingo, we just say indexes instead. So one of these indexes might track the performance of the 500 largest companies in America, and incidentally, that index in real life is called the S&P 500. You might have heard of it. But the thing is, you can't buy an index. The index isn't a stock; it's just an index. It's just a number that helps us track the performance of the overall market.

So what some clever guys and gals decided to do was to make companies make stocks that just try and mimic the performance of an index over time. So for example, the stock SPY tries to mimic the S&P 500 index. It does this by taking investors' money and quite simply buying into the top 500 companies in America.

And here's the thing: as I said before, over time, the long-term historical performance of the S&P 500 index has been about 10% per year. So these people figured out if we just create a stock like SPY and buy more shares periodically over time, if the market's long-term future looks anything like it has done in the past, then we should average roughly 10% returns per year.

And what they found is that this strategy actually works very reliably. So much so that it is now the most popular investing strategy that exists today, period. And the technical name for it, as I said, is passive investing by dollar-cost averaging. You just buy a market-tracking ETF in the same quantity at set time intervals, and you strive for the average.

And the benefit of this approach is that you don't need to worry if the market is high or low. You don't need to watch CNBC. You don't need to read annual reports or listen to the conference calls. You don't have to do any calculations whatsoever! You just have to commit to, once a quarter, maybe twice per year, coming back and just buying more shares in your market-tracking ETF, rain, hail, or shine. You show up, and you never sell. You commit to the strategy, and you follow it for decades.

So that's passive investing. Most people will probably elect to follow that approach, and that's really, really good. But some people out there are genuinely interested in the stock market and in business and will elect to be more of an active investor, which is where you buy into individual companies.

Now, as I said before, the only active investing strategy that I've found that truly covers all the bases and is reliable in the long run is the Warren Buffett style long-term value investing strategy. And as I've discussed at length on this channel before, this strategy comes down to four key pillars:

One, taking the time to understand the business; that's really, really critical.

Two, assessing whether the company has a durable competitive advantage.

Then three, making sure the management team operates with skill and integrity.

And then lastly, fourth, making sure you only buy the shares when they trade at a steep discount to intrinsic value.

Now, I won't lie to you; this process is very involved, and it does take a long time to learn. It's not super difficult, but it just takes time to tickle the boxes to make sure you're making a good investment.

So I've made many videos on the channel before discussing this approach. In fact, I'll leave a card on the screen now, taking you to a full video just on the valuation process. But if you did want to learn this approach step by step in depth, feel free to check out Introduction to Stock Analysis, which is linked in the description if you wanted to go really deep and properly learn this strategy.

I mean, it's an eight and a half hour course, but it really does leave no stone unturned. But without this video going on for like eight hours, the main points you need to follow are taking the time to understand what the business does, how much money it makes, what its future growth drivers are, and how it sits in the industry.

Then for competitive advantage, you're looking at the growth of revenue, net income, equity, and free cash flow to see if the company has been able to grow uninterrupted so no competitors can even come close. That, incidentally, is the biggest indicator that a company has a competitive advantage.

Then for management, you need to ensure the top executive's interests are aligned with yours. So you need to check their incentive structure, make sure if they do well, then you do well. You need to check how they control the company's debt levels so low or no debt, being absolutely ideal.

You need to assess how well they've been able to grow the business through their decision-making on internal reinvestment. So their return on invested capital needs to be high. And then finally, you have to absolutely must run a discounted cash flow analysis to make sure that when you buy the shares, you're buying them well below the company's intrinsic value, so you know you're getting a margin of safety.

So there is a lot of information to digest. Unfortunately, it's not quick and super easy. However, I will let you know that all of this information is in the company's regulatory filings: quarterly reports, annual reports, proxy statements. Note, this is not information that you get from CNBC.

I've never liked Tim Cook; he's not a great CEO, is he? You know, it doesn't matter what you see or hear on TV. You don't get growth estimates from YouTube videos, you know? You estimate it based on historical financial data.

So to access this info, I will say don't go to the SEC website; it's really bad. Just type in your company and then IR for Investor Relations into Google. For example, this is Apple's IR page, and this is their most recent quarterly report. It's got all the most recent financials; it'll discuss the risk factors, where the growth is coming from, etc.

Financials will be found here. Also, on the investor relations page, you can find the definitive proxy statement, which discusses the management compensation. And as a bonus, you'll also find the quarterly earnings calls, where you can listen to a quarterly Q&A session between the management and the big top dog financial analysts to hear, you know, what's up with their business.

So that's active investing. And trust me, you know, oh, my friend said price to sales! I thought we needed to check the stochastics. Oh, what about the momentum? Don't bother. Meaning moat management, margin of safety—the four M's—that is proper investing!

With that said, they are the only two strategies I would recommend for anyone. You know, no short selling, don't bother. No options trading, none of that. It's either proper active investing, Warren Buffett style, or more likely, you know, solid foolproof long-term passive investing.

Third step in the process: We need to open a brokerage account. So to buy or sell shares in public companies, you'll need a stock broker. The role of the stock broker is to connect your buy or sell order with another investor that's doing the opposite and then to actually facilitate the transfer of shares.

So if you wanted to buy 10 shares of Apple at 160 dollars per share, they will try and connect you to someone that is selling Apple at 160. They'll try and get the deal done, get the shares over into your name. Luckily, these days, a lot of brokers will do this now for free. You know, when I started, I was paying like fifteen dollars per trade; sometimes I'd pay fifty dollars per trade for international stocks. It was ridiculous!

But luckily now, brokers like Robinhood, TD Ameritrade, Charles Schwab, Webull, M1 Finance, Stake, they're all zero-commission share trading. But here's the thing: these brokers still have to make money, right? And if they aren't getting money from you, then technically, you're not the customer; you're the product.

So usually, these brokers will do something called selling order flow, and that's how they make their money. And what this is, is it's where the broker sells their customers' stock market orders on to a high frequency trading firm, where the high frequency trading firm can then see what's coming down the pike. They can take the opposite side of that trade and actually make you pay a little bit more than market value for your shares, with the trading firm keeping the difference.

Now this payment for order flow thing, it's not actually going to hurt you too bad as an individual investor. You won't pay like five dollars more per share because you're getting fleeced by a hedge fund. It'll be just the tiniest little tiny, tiny markup, but it's still something that might bother you. It's something that you should know about.

For example, every broker I mentioned before accepts Stake, accepts payment for order flow. If it bothers you, you may have to go with a broker that does charge a small brokerage fee. I know one, for example, Interactive Brokers; it is very popular, and they make a point that they do not sell order flow to generate revenue. I'm not affiliated with them in any sort of way at all; that's just what I've heard about them.

But overall, yes, step three is definitely setting up your brokerage account. And then that leads us into step four, which is the fun part—actually buying a stock. So how do you actually do this? Well, each app or broker might have a slightly different user interface, but at the end of the day, no matter what site you use, you'll be inputting the exact same information.

You will be filling out what's called a buy order or a sell order. What might this buy order look like? Well, here's an example. So the first thing you need to do, obviously, is type in the stock that you're looking to buy. For this example, we're just going to use Telstra, which is a very boring Australian telecommunications company.

Then we want to buy, so click buy, and then we can either buy the number of shares that we want, or we can buy a certain dollar amount of shares. So we could say we want to buy 100 shares, or we could say we want to buy a thousand dollars worth of Telstra shares.

Then if we go to the next line, we're going to get to the order type. Now, there are two types of orders: there are market orders and limit orders. If you select market order, this is saying I want to buy the shares at just whatever the current market price is. Whatever the price is at the time, that's what you'll buy the shares for.

However, a limit order, on the other hand, is you saying I only want to buy these shares if the stock price right now hits 3.50. I think right now Telstra's stock price is about four dollars, so it's unlikely that that would actually go through. But limit orders are great if you've already calculated the exact dollar amount that you would be comfortable paying for that stock and you don't want to go any higher.

So they're the two main order types. And then finally, we have the expiry. So we have good for the day, good till cancelled, or good until a certain date. So good for the day just means the order will be live for the rest of the trading day, and if the conditions of the order aren't met at the end of the trading day, the order will just get automatically cancelled.

Then good till a certain date means that the order will try and be fulfilled up until a date that you set, after which the order will just get cancelled. And then finally, good until cancelled will just keep the order active until you cancel it.

So personally, overall, I just use market orders, so the duration doesn't really matter to me at all because the trade just goes through instantly at whatever the market price is. But the reason that I use market orders is because I buy stocks really infrequently, and I'm very sure that I want to buy at the market price.

When I do submit a stock market order, it also ensures that my trade does actually get fulfilled. But for you, maybe limit orders are more your jam, but it really is up to you.

And really, with that said, they're all the steps you really need to start investing, but I did just want to talk about a fifth step as well because I want to touch on something that's arguably the most important factor to doing well in the stock market, and that is to really watch your investing temperament.

Investing temperament is seriously the most important factor in making money in the stock market over the long run. No matter what's happening in the market, you need to stay rational, and you need to stay true to your strategy. You will get an absolute barrage of negative news articles thrown at you.

You'll have analysts on CNBC saying buy this stock, sell this other one. You'll have market crashes where your portfolio drops 20% in a day. You'll have stock market booms where it feels like you can do no wrong! You know, you need to realize that there will be a lot of noise out there across your investing time span.

But remember, the best investors are not the ones that just—ah—they just got so lucky. No! They're the ones who stayed ultra rational for their whole investing career. I mean, honestly, it is remarkable how well you can do in the stock market just by staying in the market for three decades.

It's like ridiculously easy to do very, very well, but most people don't. And beyond anything else, the reason why most people don't make substantial money from investing, it's all down to their temperament.

They get too greedy in a bull market; they get spooked out of the market in the depths of a recession. They take a gamble on a stock that, you know, blows up in their face. They listen to some random dude on CNBC; they withdraw their money to buy a new car. There's an array of silly, silly errors that people make that absolutely kill returns, and most of them relate back to psychology and temperament.

So just go in knowing that. Know to control your emotions when things get crazy. Know to detach yourself from what's going on and stay rational because if you can truly follow the dollar-cost averaging approach for 30 years without succumbing to the noise, you'll be living life very comfortably.

If you successfully implement the Buffett style approach, you'll be sipping margaritas on a yacht in a few decades. You just have to stay calm and think critically; that's super, super, super important.

But anyway, guys, with that said, that just about brings us to the end of the video. They are the five key steps that you really do need to go through as a beginner. Make sure you do all five; they are very, very important. But see how you go with it, guys!

I hope this video was useful. If it was, make sure you leave a like on it. Subscribe to the channel if you're new around here. Like I said, I don't want to sound like a sleazy salesman, but if you wanted to learn about either the passive investing or the active investing strategy in more detail, links are down in the description below if you wanted to check out the courses that I've made on it.

Check out New Money Clips, links down in the description below for short-form New Money content. Thanks always to the Patreon producers for helping to support the channel and support the content—really appreciate it!

But, guys, that wraps us up for today. Thank you very much for watching, and I'll see you guys in the next video.

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